Bankruptcy enables individuals to make a "fresh start" after experiencing financial difficulties, especially if those difficulties are so severe that creditors' demands can no longer be reasonably satisfied. Filing for bankruptcy solves financial problems by wiping out debt altogether, or by reorganizing debt so that it can be paid within the budget of the debtor.

If you are like the average person, you may realize that bankruptcy will give you relief, but you struggle with the decision to act. You have spent your lifetime trying to do the right thing; you have sacrificed in order to meet your obligations. Sometimes you even paid your creditors when you really couldn't afford to. You may have gone without important medical services, or perhaps sacrificed the comfort and well-being of your whole family to satisfy an obligation to a creditor. Many people have "old fashioned" values, which define bankruptcy as something less than honorable. Yet there comes a time when regardless of your sacrifices, there is simply NOT enough money to meet all of your obligations to your creditors. Your creditors are unhappy because you cannot pay them the way both you, and they, had expected; and you are not happy because as hard as you try, you are not able to solve your financial problems. If anything, they get worse.

The decision to seek bankruptcy protection is totally personal, and it is very difficult. Yet having some information about bankruptcy might make the decision-making process easier. First off, it is important to understand the legal basis of bankruptcy. In order to seek protection from creditors from the Federal courts through a bankruptcy action, it is not enough to merely desire to be free from the burden of one's debts, or to be behind in one's payments; in order to file bankruptcy, the debtor must be "insolvent." The Federal Bankruptcy Code defines insolvency as a financial condition such that the sum of one's debts exceeds the sum of all one's assets.

Once the individual has decided to seek bankruptcy protection, it is necessary for the debtor to select which type of bankruptcy best fits one's needs. CHAPTER 7 is commonly referred to as a "straight" or "wash-out" bankruptcy. Under Chapter 7, the debtor is able to totally discharge most of his debts without having to repay them; he is also allowed to keep most of his assets through legal exemptions, possibly including his home. A married couple may file a joint petition and discharge not only all of their marital debts, but most of the debts they incurred prior to marriage as single individuals. The most important feature of a Chapter 7 is that the debtor can obtain a "fresh start," without having to repay the majority of his debts. This is the most common type of bankruptcy, the majority being made up of individuals who have run up consumer debts (on their credit cards), which they are unable to pay off, largely due to incredibly high interest rates.

CHAPTER 13, on the other hand, is called the "wage earner plan," because it enables the debtor to repay his creditors in a regulated and structured manner, by creating a plan for repayment. The debtor is able to keep all of his property as long as he completes the terms of his plan. Sometimes this involves the creditors accepting repayment of only a portion of the original debt, and waiving the rest, to avoid having the debtor revert to Chapter 7, whereby the debt would be discharged, and the creditor would receive nothing at all.

Bankruptcy involves placing the property of the debtor under the scrutiny of the bankruptcy courts, who appoint a Trustee who is charged with making decisions pertaining to the debts of the petitioner (the petitioner is the debtor). Certain assets of the petitioner are exempted under Federal and state laws, so that they cannot be taken to satisfy the demands of creditors; the exemptions create a bare minimum standard, that enables individuals to survive. Generally, exemptions include such things as the debtor's furnishings, clothes, appliances, cars, tools of the debtor's trade, etc. Assets that are not exempted, on the other hand, will be taken over by the Trustee appointed by the bankruptcy court, who will sell them to satisfy the debtor's obligations to his creditors. In the event that the debtor's assets are all exempted, which is often the case, then there is no distribution to creditors.

The most important feature of bankruptcy protection is the "automatic stay" provision. This puts a hold on any legal action to collect or recover a claim against a debtor in bankruptcy. The "stay" takes effect immediately once the petition is filed. It allows the debtor some breathing room from bill collectors; often it is so effective, that merely mentioning the prospect that one is considering filing a bankruptcy petition, causes bill collectors to back off.

Creditors will receive notice of the filing of the bankruptcy petition from the court. Once the petition has been filed most actions by creditors to collect money owed to them must stop. Creditors, by law, cannot initiate or continue any law suits, wage garnishments, or even telephone calls demanding payment. After the petition has been filed, a "meeting of the creditors" (341A in the Federal Bankruptcy Code) is held. The debtor must attend this meeting, and creditors may appear and ask questions regarding the debtor's financial affairs and property. Most of the time this meeting does not require the assistance of a lawyer. As always, the individual is entitled to represent himself in his own legal affairs. (Only corporations must be represented by an attorney in bankruptcy actions).

Approximately a month and a half to two months after the meeting of the creditors, the debtor will receive a "discharge" which extinguishes the debtor's obligations to pay those debts that are dischargeable. (Certain categories of debts cannot be discharged in bankruptcy, such as taxes, etc.) Unsecured debts are generally defined as obligations based purely on future ability to pay as opposed to secured debts, which are based on the creditor's right to seize property that is pledged as collateral should the debtor default on the obligation.

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